In the past half a decade, gold prices were fueled by negative rates. Now gold is driven by geopolitical risks, efforts at gold-backed trade and local prices.

Not so long ago, the conventional wisdom was that the continued recovery of the US economy would support rate hikes and thus the strengthening of the US dollar, which would pave way for gold’s further decline.

It was conventional wisdom at its best; persuasive but flawed. In reality, US recovery does not mean a return to the pre-2008 world, but secular stagnation across the major advanced economies. Consequently, as I have argued since the early 2010s, the Fed’s rate hikes will be lower and have longer intervals than anticipated.

While the Fed has begun its tightening trajectory, central banks in Europe and Japan continue to maintain quantitative easing and record-low interest rates. Historically, periods of low rates – not to speak of negative rates – tend to correlate with gold returns that are significantly higher than their long-term average.

But is the implication that the return of rate hikes will mitigate gold gains? No, not anymore.

Geopolitical risks and gold-backed world trade

After months of gains in 2016, gold decreased to $1,140 in December. Nevertheless, the past quarter has witnessed a wave of new gains as gold recently rallied to a five-month high closing at $1,290.

Today, there are new drivers behind gold as tensions are rising in Syria, North Korea and elsewhere. With increasing global jitters, investors are seeking out traditional havens from geopolitical risks.

There’s more to come. While Marine Le Pen may not win the second round of the French election in May, the bitter political struggle has increased short-term uncertainty in Europe, which will soon also witness the German election and Italy’s parliamentary turmoil. While Trump’s campaign priority was to reset US relations with Russia, the ties between Washington and Moscow are now worse than before.

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